assignment 5 Flashcards
A general partnership is formed between five businesspeople. All five partners contribute $85,000 to the partnership. If a client obtains a judgment against all five of the partners for $1,500,000, what is the maximum amount that any one partner could be liable to the client for?
- $85,000
- $50,000
- $1,500,000
- $200,000
Correct Answer: 3
Option (3) is correct because in a general partnership, each partner is jointly and severally liable for all debts and liabilities incurred, including payments beyond their initial commitment. This means that any one partner could end up being liable to the client up to a maximum of $1,500,000. Options (1), (2), and (4) are therefore incorrect.
According to the revenue recognition principle, which of the following would NOT be recognized as revenue?
- A contractor provides a service and once the job is finished, the client pays their bill.
- On the completion date of a property sale, funds are received from the purchaser of the property.
- A tenant sends in a cheque for the next six months’ property management fees.
- A licensee receives sales commission on the date the title is transferred to their client, as per the Agent contract.
Correct Answer: 3
Option (3) is correct because one cheque covering six months’ property management implies that for the months in advance, a service has not been rendered and so has not yet been earned, which is not in accordance with the revenue recognition principle. According to the revenue recognition principle, revenue should be recognized when earned, not necessarily when cash is received. Options (1), (2), and (4) are incorrect because they are situations when money has exchanged hands and a service has been rendered or goods have been delivered.
Mackie’s Trucks Ltd. has a corporate tax rate of 15%. Mackie, the owner, has a personal tax rate of 30% and his wife, Lilou, has a personal tax rate of 25%. If Mackie dies in 20X1, leaving the shares of the company to Lilou, who takes over running the company in 20X2, what is the company’s tax rate for 20X2?
- 25%
- 35%
- 15%
- 30%
Correct Answer: 3
Option (3) is correct because the company’s tax rate remains the same, no matter who owns the company. Corporate tax rates are not determined or affected by personal tax rates, so Mackie’s Trucks Ltd. will have a 15% tax rate in 20X1 and in 20X2. Options (1), (2), and (4) are therefore incorrect.
Steep Slopes Development Inc. purchased a property (land and building) for $1,135,000 five years ago. The building is expected to have a useful life of 25 years, after which it will be have a salvage value of $15,000. Depreciation expense on the income statement using the straight line method is $17,000.
What was the purchase price of the building and the land, respectively?
- $340,000; $795,000
- $440,000; $695,000
- $425,000; $710,000
- There is insufficient information given to determine the cost of both the building and the land.
Correct Answer: 2
Option (2) is correct because the purchase price of the building is $440,000 and the purchase price of the land is $695,000. To determine the original purchase price of the building, the original estimated or economic life of 25 years must be used.
Re-arranging this equation, we get:
Purchase price = Cost = (Annual Depreciation Expense × Estimated Economic Life) + Salvage Value
= ($17,000 × 25) + $15,000
= $440,000
The original purchase price of the building was $440,000. Therefore, the cost of the land is $695,000 ($1,135,000 – $440,000). Options (1) and (3) are incorrect because they do not show the correct purchase prices of the building and the land. Option (4) is incorrect because there is sufficient information available to determine these costs.
Steep Slopes Development Inc. purchased a property (land and building) for $1,135,000 five years ago. The building is expected to have a useful life of 25 years, after which it will be have a salvage value of $15,000. Depreciation expense on the income statement using the straight line method is $17,000.
What is the current book value of the building?
- $911,000
- $598,000
- $1,050,000
- $355,000
Correct Answer: 4
Option (4) is correct because the current book value of the building is $355,000. To determine the book value, the estimated remaining life of 20 years must be used.
Re-arranging this equation, we get:
Cost = (Annual Depreciation Expense × Estimated Remaining Life) + Salvage Value
= ($17,000 × 20 years) + $15,000
= $355,000
The book value of the warehouse is $355,000. Options (1), (2), and (3) are incorrect because they do not show the current book value of the building.
Steep Slopes Development Inc. purchased a property (land and building) for $1,135,000 five years ago. The building is expected to have a useful life of 25 years, after which it will be have a salvage value of $15,000. Depreciation expense on the income statement using the straight line method is $17,000.
The building is identified as a Class 1 asset and the rate applied for tax purposes is 4%. How much CCA can the firm claim at the end of the fifth year?
- $17,600
- $15,260
- $8,800
- $14,948
Correct Answer: 2
Option (2) is correct, as shown in the following table. Options (1), (3), and (4) are incorrect because they do not show the correct CCA claim that can be made at the end of the fifth year.
Year
Remaining depreciable base or UCC
Maximum claim of CCA
CCA claimed
1
$440,000
440,000 × 4% × ½
$8,800
2
$431,200 (440,000−8,800)
431,200 × 4%
$17,248
3
$413,952 (431,200−17,248)
413,952 × 4%
$16,558
4
$397,394 (413,952−16,558)
397,394 × 4%
$15,896
5
$381,498 (397,394−15,896)
381,498 × 4%
$15,260
Marini is in the business of buying stationary directly from the manufacturer and then reselling to retailers. Which one of the following transactions is MOST likely to violate the Generally Accepted Accounting Principles (GAAP)?
- Marini buys three months’ worth of cleaning supplies in March and expenses the total amount.
- Marini buys 30 boxes of pens in June and expenses the total amount before they are resold.
- Marini buys a printer for the office and expenses it according to its expected useful life.
- Marini buys annual insurance for the business and expenses the cost over the entire year.
Correct Answer: 2
Option (2) is correct because Marini is violating the matching principle: expenses directly associated with particular revenues should be recognized in the same period in which the revenue is recognized.
Marini is in the business of supplying stationary to retailers; the pens are inventory and the expense should be matched with the revenue earned upon their sale.
Option (1) is incorrect because it applies the materiality principle: relatively low-cost item, such as cleaning supplies, that are used up over several months may be expensed immediately.
Options (3) and (4) are incorrect because they apply the matching principle, which allocates the cost of the assets that benefit the business for more than one accounting period.
A limited partnership is formed between two general partners and three limited partners. All five partners contribute $85,000 to the partnership. A creditor obtains a judgment against the limited partnership for $2,100,000. What is the maximum amount, beyond their initial investment, that any one limited partner could be personally liable to the creditor for?
- $0
- $85,000
- $700,000
- $2,100,000
Correct Answer: 1
the key thing here is that the question is asking “ beyond their initial investment” - the question did not ask you the amount the limited partner would pay which would be $85,000 that they invested.
Option (1) is correct because the form of organization is a limited partnership, where the limited partners do not take part in the day-to-day operations of the partnership, therefore their personal liability is limited to the amount paid into, or agreed to pay into partnership.
Options (2), (3), and (4) are incorrect because they do not show the maximum amount that a limited partner may be held personally liable for beyond their initial investment.
According to the balance sheet equation, which of the following statements is TRUE?
- Liabilities may be greater than the difference between assets and owner’s equity.
- The total of a firm’s liabilities and owner’s equity may exceed its total assets.
- The total assets of a company must be equal to its sources of capital.
- Owner’s equity cannot exceed current and non-current liabilities.
Correct Answer: 3
The balance sheet equation states:
ASSETS = LIABILITIES + OWNER’S EQUITY
Option (3) is correct because it is a true statement: the two sources of financing are the creditors (liabilities) and owners (owner’s equity). Therefore, total assets must be equal to these sources of capital.
Options (1) and (2) are incorrect because liabilities and owner’s equity must be equal to total assets as shown in the equation above. Option (4) is incorrect because according to the balance sheet equation, owner’s equity may be greater than current and non-current liabilities.
Which of the following statements regarding accounting is TRUE?
- Net income reported on the income statement is the same as taxable income that is reported on the income tax return.
- Land is a depreciable asset.
- Depreciation is not a deductible expense in computing taxable income.
- The straight line method of depreciation estimates the physical life of the asset.
Correct Answer: 3
Option (3) is correct because it is a true statement.
Option (1) is incorrect because taxable income on the income tax return is derived using capital cost allowance (CCA), whereas depreciation expense is used to derive net income on the income statement; depreciation expense and CCA may differ.
Option (2) is incorrect because land is not a depreciable asset.
Option (4) is incorrect because straight line depreciation estimates the economic life of the asset, meaning how many years the asset will benefit the enterprise, not its physical life.
Which of the following statements regarding forms of business organizations is TRUE?
- A limited partnership (LP) is a variation of a general partnership where all partners are actively involved in management and are jointly and severally liable.
- A limited liability partnership (LLP) requires that limited partners are passive investors only, who cannot be involved in the management of the firm.
- A corporation can never cease to exist.
- A corporation has the ability to defer income taxes for the owners by keeping profits in the form of retained earnings.
Correct Answer: 4
Option (4) is correct because when a corporation earns profits, the directors can choose to distribute the income to the shareholders in the form of dividends or choose to keep the profits invested in the company in the form of retained earnings.
Option (1) is incorrect because limited partnerships (LPs) are not a form of general partnership in that they include both passive and active partners, with their risk of liability defined by their involvement within the partnership.
Option (2) is incorrect because a limited liability partnership (LLP) allows each limited partner to be active and to be involved in managerial decision making. Only limited partners in a limited partnership (LP) are required to be passive investors.
Option (3) is incorrect because a company can cease to exist if it is terminated by the shareholders.
Cardinal Limited has three shareholders: Asviny and Bassam each own 40% of the shares while Ciara owns the remaining 20%. The retained earnings as at December 31, 20X1 were $120,000. No dividend payments or withdrawals by shareholders were made between December 31, 20X1 and December 31, 20X2. The shareholders’ equity section of the balance sheet as at December 31, 20X2 of Cardinal Limited is as follows:
Shareholders’ Equity
Shares $300,000
Retained Earnings $185,000
Cardinal Limited decided to distribute some of its 20X2 net income between the shareholders in proportion to the amount of shares they owned. Asviny and Bassam each received $26,000 in dividends before tax. If Ciara’s personal tax rate is 30%, how much will her after-tax share of the net income distributed at December 31, 20X2 be? Assume that there is no dividend tax credit.
- $9,100
- $13,000
- $6,000
- $2,600
Correct Answer: 1
Option (1) is correct because Ciara’s after-tax share of net income distributed on December 31, 20X2 is $9,100. There are two ways to calculate this. First, consider that Asviny and Bassam each received 40% of the net income, dividends distributed ($26,000 × 2). Thus, the total net income distributed was $65,000 ($52,000/0.80).
Since Ciara receives 20% of the total net income distributed or $13,000 ($65,000 × 0.20), her after‑tax share of the net income distributed is $9,100 ($13,000 × (1 – 0.3)).
The total net income distributed could also have been found by determining the increase in retained earnings from 20X0 to 20X1 ($185,000 – $120,000 = $65,000).
Ciara’s after‑tax net income would then be found as above.
Option (2) is incorrect because $13,000 is Ciara’s share of the total net income distributed before taxes.
Options (3) and (4) are incorrect because they are not the after-tax share of net income distributed to Ciara.
On January 1, 20X1, Nian’s Strollers Ltd. purchased $80,000 worth of baby strollers, which were to be sold to customers. On December 31, 20X2, Nian still had 35% of the strollers left in inventory. Calculate the cost of goods sold (COGS) expense for income statement purposes for 20X1 and 20X2. Assume 40% of the strollers were sold in 20X1 and 60% of the strollers were sold in 20X2.
- $7,280 in 20X1, $10,920 in 20X2
- $20,800 in 20X1, $31,200 in 20X2
- $31,200 in 20X1, $20,800 in 20X2
- $10,920 in 20X1, $7,280 in 20X2
Correct Answer: 2
Option (2) is correct because the cost of goods sold in 20X1 is $20,800 and the cost of goods sold in 20X2 is $31,200.
The stroller inventory purchases should be allocated using the matching principle, which states expenses are matched with the revenue they generate.
Thus, if 35% of the stroller inventory remain at the end of 20X2, the amount sold is $52,000 (65% × $80,000) and is allocated to the two years accordingly:
$20,800 (40% × $52,000) for 20X1 and $31,200 (60% × $52,000) for 20X2.
Options (1), (3), and (4) are incorrect because they do not show the correct cost of goods sold in 20X1 and 20X2.
Upsilon Company Ltd. purchased new machinery at a total cost of $600,000. Management estimates that the machinery will last for 20 years, after which it will have no salvage value. The CCA rate applied to the machinery is 4%. When the company disposes of the machinery 20 years later, what will be the deduction for capital cost allowance on the company’s tax return?
- $20,000
- $0
- $5,000
- $10,000
Correct Answer: 2
Option (2) is correct because following the final year rule, CCA cannot be claimed for an asset in the year of disposition, even if the asset is owned for the majority of the year, therefore the deduction for capital cost allowance will be $0.
Options (1), (3), and (4) are therefore incorrect.
One year ago, Prestige Company Ltd. purchased a new factory at a total cost of $1,500,000 (for the land and the building). The owner, Prescott, estimates that the factory will last for 35 years, at which time the salvage value will be $10,000. The CCA rate applied to the building is 4%. It is now the year end and Prescott must prepare the company’s tax returns. If the income statement has a depreciation expense of $18,750 (using the straight line depreciation method), what is the building’s capital cost allowance for the first year?
- $18,750
- $13,325
- $9,375
- $19,375
Correct Answer: 2
Option (2) is correct. The calculation for the building’s capital cost allowance for the first year is as follows:
Total cost of building + land = $1,500,000
Life of building = 35 years
Annual depreciation using the straight line method of depreciation = $18,750
Building’s share of cost = 35 × $18,750 + $10,000 = $666,250
Capital Cost Allowance = (0.04 × $666,250) × 0.5 = $13,325
Options (1), (3), and (4) are incorrect because they do not show the correct capital cost allowance for the building in its first year.
